💥New Chapter 11 Bankruptcy Filing - Wheel Pros LLC💥
All it took was one year for the company's hyped "double dip" LM to fail.
PETITION Note: we recommend pairing this reading with a classic:
So that sure didn’t take long.
On September 8, 2024, Wheel Pros LLC (d/b/a Hoonigan), a Colorado-based designer, marketer, and seller of aftermarket automotive wheels backed by Clearlake Capital Group (“Clearlake”), along with 26 affiliates (collectively, the “debtors”) filed prepackaged chapter 11 bankruptcy cases in the District of Delaware (Judge Dorsey). This filing comes just a year — ⚡️yes, only a year, 🙄⚡️— after completing a much-publicized “double dip” liability management (“LM”) transaction. That’s right, folks: you can add this one to the growing list of busted LM deals, see also J.Crew, Serta Simmons, RobertShaw, Incora, etc., 🥱. Unfortunately, this not-so-exclusive club will likely continue to expand.
We first wrote about the company back in September ‘23…
… after the company announced the LM deal.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F8c069605-91fc-4ea2-bb8e-92c1761803c1_961x287.png)
We detailed how the company had been struggling operationally and that the market reflected the piss poor performance in the form of a distressed-priced $1.175b ‘28 L+450 term loan and even deeper-distressed-priced issuance of 6.5% ‘29 senior unsecured notes. Both pieces of debt whipsawed throughout ‘23, culminating in the LM deal's announcement on the rather ominous date of September 11, 2023. Happy anniversary, guys!
Significantly, the press release indicated:
Wheel Pros, Inc. ("Wheel Pros" or the "Company") today announced that it reached an agreement with a majority of its lenders for a comprehensive transaction that includes a "new money" term loan, a refinancing and/or exchange of existing debt and a maturity extension of its ABL facility, the result of which will provide the Company with liquidity and reduce total debt. All existing lenders will be offered the opportunity to participate in the transaction. (emphasis added)
Note the bits about “majority of its lenders” and “offered the opportunity to participate.” How did that play out? Well, 11 days later the company dropped this:
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F0d8b8b5c-3b66-48c0-9970-8797be0efa5d_1908x552.png)
You’ll recall that back in February …
… and then in Part II in April …
… King & Spalding LLP’s Michael Handler made a guest appearance with PETITION, offering a primer of sorts on “Double Dip” deals, the then-latest-and-greatest LM technology. In Part II, he discussed the now-debtors at length — it’s worth a revisit because it discusses, in some detail, the mechanics of the deal. Which is great because Mr. Handler literally spilled more ink on the deal in a PETITION newsletter (an a$$-kicking one, we might add) than CEO Vance Johnston does in the entirety of his first day declaration (“FDD”). He writes in the introduction to the FDD:
The Company initially sought to improve its liquidity through balance sheet initiatives. In September 2023, after arm’s-length negotiations, the Company entered into a financing transaction (the “FILO Transaction”) with 99.7% of its existing secured term lenders, which provided a $235 million new money FILO credit facility and a $1.4 billion discounted debt exchange, allowing the Company to capture $140 million of discount on its funded debt obligations. The FILO Transaction extended the Company’s liquidity runway, providing some breathing room for the Company to address legacy SG&A and operational challenges directly. While the additional liquidity supported the Company’s balance sheet, the Company continued to miss near term projections, requiring the Company to consider broader initiatives.
And later in the FDD:
In September 2023, after months of arm’s-length negotiations, the Company entered into the FILO Transaction. This involved both a discounted exchange of $1.4 billion of existing funded debt obligations and $235 million of new-money financing in the form of the FILO Loans. The FILO Transaction provided the Company with both maturity relief and significant incremental liquidity.
That’s literally all he had to say about the LM deal LOL.
![Thats It GIF by 2020 MTV Video Music Awards Thats It GIF by 2020 MTV Video Music Awards](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_lossy/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fc219ffdb-0e3c-4dd2-8de9-665575653014_480x270.gif)
They couldn’t even do us the favor of supplying this handy chart so the more visual-oriented among us can see exactly what that LM deal translated into:
Instead all we get is this:
What does it show? The FILO referenced by Johnston, for starters. The “almost” 100% participation out of the “Legacy First Lien Loan” into the “NewCo First Lien Loan.” And the uptier of the Legacy Notes into the NewCo Notes. You’ll recall that the debtors and Wells Fargo Bank NA ($WFC), as agent, contemporaneously extended the ABL Facility too.
Ultimately, as we now know, all of the balance sheet chicanery in the world couldn’t blunt the debtors’ operational challenges.* Per the debtors:
The COVID-19 pandemic led to sharp increases in product demand, largely due to increased outdoor leisure time and governmental stimulus support provided to customers. Indeed, heightened demand, coupled with a series of acquisitions in the automotive space, resulted in the Company’s revenue almost doubling between 2019 and 2022. During this period, the Company also acquired companies that expanded the Company’s sales channels outside of the scope of its historic core business and distribution model, including retail locations and e-commerce platforms, with the intention of keeping up with consumer purchasing preferences and expanding the availability of Hoonigan’s products.
Turns out, as we’ve seen time and time again, the debtors over-indexed to a “post-pandemic new paradigm” thesis.
However, macroeconomic issues, including a rapid and dramatic rise in interest rates, persistent inflation, burdensome supply chain disruptions, a decline in customer demand well below the historical trendline, and unsustainable debt service obligations all placed significant pressure on the Company’s revenue and cost structure.
Also, it turns out that integration of acquisitions isn’t so easy:
These factors, together with the inherent challenges of integrating the new products, brands, and operations of acquired companies resulted in significant liquidity challenges for Hoonigan in 2023.
This is, in total, what that looks like:
Indeed, after the LM transaction, “…the Company continued to miss near term projections, requiring the Company to consider broader initiatives.” Heads rolled. The company brought in a new exec team and launched a variety of operational initiatives designed to cut costs. And cut costs they did: they company realized “…an annualized run-rate EBITDA improvement of $39 million in FY 2023….”Alas, it still wasn’t enough and the debtors’ liquidity picture got uglier and uglier. In early July, the $1.1b TL due in May ‘28 priced around 77c on the dollar. A few weeks later, the company missed an interest payment.
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fe7d02b51-4603-456d-82a9-d23cbcdfc63a_634x146.png)
And so here we are. A (proposed 40-90 day) prepackaged bankruptcy** to effectuate a restructuring support agreement (“RSA”) supported by holders of 74% of the obligations under the FILO Loans, 99% of the obligations under the NewCo First Lien Loans, 100% of the obligations under the NewCo Notes, and 7% of the obligations under the Legacy Notes. The debtors also intend to use that swift period to negotiate an exit ABL and sell certain non-core assets (e.g., 4WP, acquired in June ‘22 for a “retail footprint” and expanded e-commerce presence, and Poison Spyder Customs Inc.) for plan distribution purposes. Ultimately, the proposed plan of reorganization will eliminate $1.2b of funded pre-petition. The question is how that gets done.
First, you need some that good ol’ American greenback.
The RSA contemplates a $175mm senior secured superpriority SOFR+4% DIP ABL (subject to a “creeping” roll-up) and a $110mm SOFR+8.5% new money senior secured superpriority term loan ($85mm on an interim basis). The debtors also get the consensual use of their lenders’ cash collateral.
And, second, there’s the plan. The “fulcrum security” is at the First Lien Claims level — which includes both NewCo First Lien Claims and the $4mm of Legacy First Lien Loans. That means two things: (i) the FILO Term Loan will get paid in full (note, at $280mm); and (ii) the First Lien Claims will get 85% of the post-reorg equity (subject to a management incentive plan), an amount that the debtors indicate represents a 52% recovery.
The remaining 15% of equity will go to those First Lien Claimants that backstop a proposed $570mm exit term loan facility.
You see that Class 6? That class includes the NewCo Notes, the $93mm of Legacy Notes, and the First Lien lenders’ deficiency claims. If the class approves the plan, the very large deficiency claims will be disregarded and the class will get to share in a whopping $500k cash recovery or as the debtors put it in the chart above, roughly 🍩.1%, lol. Notably, general unsecured claimants will get repaid in full or reinstated. Don’t want a committee here!
So, in the end, the LM deal appears to have achieved little for anyone — well, other than the professionals getting a second bite at the fee apple.*** The new money didn’t last long. The “discount capture” in the exchange didn’t impact much. And the maturity extensions bought literally only a year. At least Clearlake got to play out that one-year call option! What a f*cking joke.
And what of the double dip component? What’s it’s significance under this construct? Take a look at the “Intercompany Claims” entry in the table ⬆️. And let’s turn back to Mr. Handler, who get’s the benefit here of a “double-dip” appearance with PETITION:****
“The proposed plan treats the intercompany claim component of the double dip term loan (totaling $1.26b) as part of the Class 8 “Intercompany Claims” and discharges it without any distribution on account thereof. In other words, after all of that “double dip” hype (including devoting a significant portion of my terrific Petition piece to the transaction), the intercompany claim component was disregarded for plan distribution purposes. But before everyone starts singing in unison “in the end, it didn’t even matter,” the Intercompany Term Loans are included in the disclosure statement’s liquidation analysis for purposes of showing that the proposed plan satisfies the “best interests” test or Section 1129(a)(7) of the Bankruptcy Code (which requires a non-accepting holder receive or retain under a plan what such holder would receive or retain if the debtors liquidated under chapter 7). Thus, the liquidation analysis includes the Intercompany Term Loans in the “Total Deficiency Claims of $2.843.8 billion to $2.947.2 billion.” The Legacy Notes Claims — which is the only funded debt tranche not a party to the RSA in an amount sufficient to carry the class if it was separately classified for plan voting purposes — is $110.2mm or 4% of the deficiency claim total. If a group of holders of Legacy Notes organized to object to the proposed plan for purposes of meaningfully improving their treatment thereunder, they would have to fight a two-front war of establishing (i) that there is significant unencumbered value that should be shared pro rata by the general unsecured creditors and (ii) that the Intercompany Term Loans and other components of the term loan deficiency claim should be disallowed or otherwise waived. In sum, whereas the Intercompany Term Loans do not affect distributions under the proposed plan, they could become relevant if a group of holders of Legacy Notes objected to the plan.”
Could. We’ll see whether they do. A confirmation hearing has already been set for October 15, 2024.
The debtors are represented by Kirkland & Ellis LLP (Anup Sathy, Steven Serajeddini, Yusuf Salloum, Erica Clark, Casey McGushin, Lindsay Wasserman, Ashley Surinak, ) and Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, Timothy Cairns, Edward Corma) as legal counsel, Alvarez & Marsal LLC (Cari Turner) as financial advisor and Houlihan Lokey Capital Inc. (Matthew Braun) as investment banker. A special committee helmed by Jonathan Foster is represented by Cole Schotz PC. The ad hoc group of lenders is represented by Akin Gump Strauss Hauer & Feld LLP (Philip Dublin, Daniel Fisher, Zachary Lanier, Omid Rahnama) and Potter Anderson & Corroon LLP (M. Blake Cleary, Gregory Flasser, Maria Kotsiras) as legal counsel and PJT Partners LP ($PJT) as investment banker. Strategic Value Partners LLC is the largest holder of the NewCo First Lien Loans and NewCo Notes; it is represented by Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen, David Kratzer) as legal counsel and Lazard Freres & Co. as investment banker. Morgan Lewis & Bockius LLP (Christopher Carter, Stephan Hornung, David Shim) and Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Matthew Harvey, Sophie Rogers Churchill) represent Wells Fargo as pre-petition and DIP ABL Agent. Finally, Clearlake has Katten Muchin Roseman LLP (Steven Reisman, Cindi Giglio, Lucy Kweskin) and Polsinelli PC (Christopher Ward, Michael DiPietro) in its corner.
*One can only wonder whether Clearlake “PE Bro’d” the hell out of this company with a rollup of hobbyist sh*t:
**Technically this is a “straddle” prepack in that solicitation commenced but didn’t finish pre-petition.
***Notably, the consenting lenders to the deal have already agreed that they will “not object to or otherwise seek to hinder” payment of Houlihan’s fees and expenses.
****Technically triple DIP since we broke the primer up into two parts but whatever.
Company Professionals:
Legal: Kirkland & Ellis LLP (Anup Sathy, Steven Serajeddini, Yusuf Salloum, Erica Clark, Casey McGushin, Lindsay Wasserman, Ashley Surinak, ) and Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, Timothy Cairns, Edward Corma)
Independent Director (Special Committee): Jonathan Foster
Legal: Cole Schotz PC
Financial Advisor: Alvarez & Marsal LLC (Cari Turner)
Investment Banker: Houlihan Lokey Capital Inc. (Matthew Braun)
Claims Agent: Stretto (Click here for free docket access)
Other Parties in Interest:
Pre-petition + DIP ABL Facility Agent: Wells Fargo Bank NA
Legal: Morgan Lewis & Bockius LLP (Christopher Carter, Stephan Hornung, David Shim) and Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Matthew Harvey, Sophie Rogers Churchill)
Financial Advisor: Berkeley Research Group LLC
Pre-petition FILO Agent + NewCo 1L TL Agent: Alter Domus (US) LLC
Pre-petition NewCo Notes Indenture Trustee: GLAS Trust Company LLC
Indenture Trustee under Legacy 6.5% ‘29 unsecured notes: Wilmington Trust NA
Ad Hoc Group of Lenders: Centerbridge, Bain, Nut Tree, Artisan, Monarch
Legal: Akin Gump Strauss Hauer & Feld LLP (Philip Dublin, Daniel Fisher, Zachary Lanier, Omid Rahnama) and Potter Anderson & Corroon LLP (M. Blake Cleary, Gregory Flasser, Maria Kotsiras)
Financial Advisor: PJT Partners LP
Lender: SVP
Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen, David Kratzer)
Financial Advisor: Lazard Freres & Co.
Exit Term Loan Facility Agent
Legal: Ropes & Gray LLP
Sponsor: Clearlake Capital Group LP
Legal: Katten Muchin Roseman LLP (Steven Reisman, Cindi Giglio, Lucy Kweskin) and Polsinelli PC (Christopher Ward, Michael DiPietro)